U.S. stocks fall on China slump, impact of possible stimulus cut

U.S. stocks fell, sending the Standard & Poor’s 500 Index to a nine-week low, after Chinese equities entered a bear market amid concern a cash crunch will hurt growth and as investors weighed the impact of a possible reduction in the Federal Reserve’s monetary stimulus.

The S&P 500 fell 1% to 1,576.60 at 3:50 p.m. in New York. The index trimmed an early drop of 2% after Fed Bank of Dallas President Richard Fisher said investors shouldn’t overreact to plans to slow bond purchases. The Dow Jones Industrial Average slipped 106.13 points, or 0.7%, to 14,715.16. Trading in S&P 500 stocks was 37% above the 30-day average during this time of day.

“Fisher’s comments seemed to dial back some of the negative rhetoric that people had in terms of Chairman Bernanke’s comments last week,” Michael James, a managing director of equity trading at Wedbush Securities Inc. in Los Angeles, said in a phone interview. “This remains a trader and sentiment-driven market that’s susceptible to swings in either direction at the drop of hat.”

The S&P 500 sank 2.1% last week, the most since April 19, after the Fed Chairman Ben S. Bernanke said the bank may start paring stimulus measures as soon as September if the economy improves in line with its forecasts. The stimulus has helped fuel a rally in stocks worldwide, with the benchmark U.S. index surging 133% from its March 2009 low.

‘Feral Hogs’

Investors behaved like “feral hogs” after the Fed’s comments June 19, Fisher said in an interview with the Financial Times published today on its website. He reiterated in a speech in London today his support for reduced bond buying this year if the economy makes the kind of progress officials are currently expecting.

Economic data this week could add to the case for the Fed to slow purchases. Reports tomorrow may show U.S. durable-goods orders rose and house prices continued to recover, according to Bloomberg surveys of economists. Data last week showed sales of previously owned homes climbed in May to the highest level in more than three years and manufacturing improved in June.